Treasury patches up regulatory system

Our big banks may have played a big role in sparking the recession as a consequence of the losses they've incurred on their reckless lending and investing.

And the Financial Services Authority and Bank of England may have failed miserably to curb the City's dangerous excesses during the boom years.

But the Treasury has opted for correcting the flaws in the existing three-pronged regulatory system created in 1997 by Gordon Brown - rather than doing what the Tories want, which is to dismantle the so-called tripartite approach and confer the important powers to prevent bank crises on the Bank of England.

Also, the Treasury's 140-page paper on reforming financial regulation - to be published at last, many weeks after initial deadlines - will say that our big complex banks can be made safe by an FSA which forces them to hold substantially more capital and cash as a protection against losses and runs.

The Treasury will reject demands to break up the likes of Royal Bank of Scotland and Barclays, or to hive off what the governor of the Bank of England calls their casino operations from their state-insured retail arms, the parts that look after our precious savings.

But it will urge the FSA to make good on its promise to penalise banks that give big bonuses to executives that take dangerous risks.

It won't all be patching, re-seaming and darning. There'll be a proposal to give the Bank of England increased formal responsibility for assessing whether financial markets are overheating in a dangerous way, but the decision on how to curb banks in general from lending too much - as and when they're doing so again (if only) - well that's being postponed pending the outcome of international negotiations.

As I said in my note on Monday, everyone seems to agree that the globalised financial economy would be safe to swim in again if only we had lifeguards with macro-prudential tools to curb systemic financial risk, but no two geniuses can agree which tools are best.

Anyway it's clear that the Treasury would want the Bank of England to do macro-prudential policy, as and when the Treasury has worked out precisely what macro-prudential policy might be.

UPDATE, 07:19, 8 July: By the way, I'm very uncertain about whether the governor of the Bank of England will think he's getting the powers he needs from the Treasury.

It's pretty clear, to use his analogy, that the Bank of England's future sermons will have more teeth than hitherto - they'll be more like a papal encyclical than a gentle Sunday morning morality tale.

But whether Mervyn King will still feel he needs more direct powers to intervene in the affairs of banks, well we'll just have to wait for his reaction.

Comment number 1.

Get the big bank bosses in for tea and pay no attention at all to the real interests of the millions of individuals, and the hundreds of thousands of small and medium sized businesses, who really make this country work, and who have no other option but to use the banks to put their money and savings.

Continue to let the big banks and the bankers secure their own fortunes by playing with our money, at no downside risk at all to themselves.

Gordon Brown and Alistair Darling and the rest of them are simply too scared to put the interests of the people first.

I can almost feel them quivering right now, not knowing which way to turn.

Comment number 6.

Well of course Mervyn wants total control of the UK's finances. that's what the Bank of England was created for, to take control of the finances of this country away from parliament and out of the hands of the people.

The Bank of England does not act in the best interest of the people and to issue them with more power considering the extremely poor record at keeping the economy stable, which it is their remit to do, would be foolhardy to the extreme.

What Gordon is proposing in trying to enforce Banks to hold a higher level of capital reserves over and above the currently required 10% is wise and prudent.

That said, there would be two things that would be more wise.

1. To put an end to the practice of fractional reserve lending, that is to enforce a policy of 100% reserves. i.e. Banks can only lend what they actually have. Why should they be able to lend money they can't actually back up by any reserves or capital and then also to charge interest on this make believe money?

2 To take back the responsibility of the issuing of money from the Bank of England and put it back in the hands of Parliament and the people. Then print debt-free fiat currency to serve the peoples needs. The economy should serve the people, not the people the economy.

The crime of the debt laden fiat currency we currently have coupled with fractional reserve lending is the biggest fraud in history.

Of course, these would only be wise actions if there were also a sound plan to ptotect the economy from the inevitable backlash from those who would stand to lose from such actions.

Comment number 8.

Yet another enormous error on the part of this government. Having been complicit in Clinton's destruction of the Glass Steagall act ( the act of congress brought in after the great depression, to seperate the activities of investment and commercial banks and prevent another great depression) and the build up of the systemic risks which lead to the last great depression, we decide we will leave well enough alone. Seperating the investment banking and high street banking operations and removing the "too big to fail" institutions is the only way to bring back a safe level of risk to our banking system, by diversifying the type of business they do. We repealed Glass Steagall and low and beholdd we are in the greatest financial crisis since the depression. So what changed. Even our dull witted PM and Chancellor must be able to read a history book.

Comment number 9.

Is this suppose to be regulations to end 'boom and bust'?Or, to smooth the cycle - less of a boom and less of a bust?

Why does capitalism have boom and bust?'Animal spirits' - we get over-optimistic and then over-pessimistic?

Previous societies only produced less when there were external factors like famine, plague, war.Only capitalism goes into decline and produces less even though the needs are still there (one-sixth of the world going hungry) and the means are there (the supply side is not the cause of the decline).

Is it not self-evident that capitalism only produces for profit?If there is no profit to be made it doesn't produce, even if there is human need.

Think of a society that reproduces itself.The essential elements are:1. Capital goods to replace those worn out from the previous period2. Labour to produce the goods3. Profit, so the capitalists can buy luxury goods (and be bothered with the whole process)

Labour is called 'variable capital' because it is purchased with capital by the capitalist - i.e. wages. Just as the capitalist purchases 'constant capital' - raw materials, machines, lighting, etc.Constant capital by itself does not increase in value.It requires labour power to transform them into commodities that have a higher value on the market than the amount paid in wages.This is why labour is variable capital.It is the secret to where profit comes from - the difference between the value of the commodities produced by labour and the value paid in wages.

It is because labour is the source of profit that as capitalists invest in more fixed capital (machines) that the ratio of constant capital (the amount needed to maintain the fixed capital) to variable capital increases (wages).

It is this increase in the organic composition of capital that depresses the rate of profit.Some capital units need to go bankrupt to reduce the ratio and so restore the rate of profit.

Boom and bust is inherent to the capitalist system - they cannot regulate it away.

Comment number 10.

The Tories wish to end regulation for some unspecified "solution" that requires the Bank of England to be the regulator. The only difference between the two approaches is that the Banking Industries require less resources to effectively lobby their interests with a unitary regulator.

The problem of regulation is not a problem of institutions but of effectiveness. There has been no culpability, on a global scale, for the artificially created crisis. We can reasonably expect the crisis to reoccur in the future. There is no matter of "if" but only of "when". That future crisis will, again, be created by bankers. There has been no effective response given or proposed by any Party and so, the interests of the electorate are, again, sidelined in favour of boadrooms.

The time has come to punish banks that hold inadequate capital reserves by simply mutualising them in favour of their depositors. Bankers argue that they take big risks and expect big rewards. It is time for the electorate - who have underwritten the banks - to take the same line of argument. We have taken big risks in underpinning the banks, we expect big rewards.

Comment number 12.

Variations on the same tune of Labour being dazzled by the City. The big financial institutions need public supervision not fragmented regulation. The state and consumers need to be represented on the policy boards of the banks. The FSA should be regulated by the BoE and the later concerned with the interests of consumers including SME's. There should be statutory requirements on the means by which credit is obtained and expanded related to the strategic needs of the economy - especially manufacturing.

Comment number 14.

Who on earth would take seriously Comical Ali? Too big to fail? Well so merge Lloyds and HBOS! Need more stability? Well create the biggest capital arbitrage scam (APS scheme!) in favour of Llyods and RBS and then ask all the other banks to raise genuine capital to align...if it was not so serious it would be a joke!

Comment number 15.

Ban fractional lending??! What you're saying is not banks can only lend what they actually have, but what they actually have in cash. I believe this would only prevent a largely redundant problem - bank runs (when medium sized deposits are now guaranteed).

Implementing a mandatory high (by recent standards) cash reserve ratio is a no brainer and a necessity in this country, however anything further is nonsense. How could banks continue to offer collateral loans? Imagine a fire sale of 'safe' investments by lenders (gilts etc) and the impact on government (tax payer) debt.

A Britain that is net flat of lending and borrowing is a utopian picture, and a million miles from the reality of our situation. If the average household in this country is indebted to banks by tens of thousands, how is this even possible?

In my opinion, this view reflects a lack of understanding of the banking system in this country. The quality (lack of) of on bank's balance sheets is as a result of poor and irresponsible lending practices, and the refusal to acknowledge this in their subsequent securitisation by investment banks (price-wise and ratings-wise).

I don't believe totally removing responsibility from the banking system is the answer, but forcing people to act responsibly - this is also where bonus culture in investment banking and retail lending (worst example is pre-crunch US mortgage brokers) needs to be addressed. Ensure bankers (I am one) cannot take large risks for short term gain by paying them increasingly in company stock, and by averaging their returns over much larger periods than one year would be a good start.

I agree why people are angry with the industry; capitalism in the good times and socialism in the bad times cannot exist any longer - but it's a problem that needs to be thought about carefully and not rashly.

Comment number 16.

The banks are too powerful. We need to break them up. Investment banks are gambling with our cash and I for one do not trust them.If the government won't do it then we should. Move your accounts. Do some research and find a building society which has kept well away from the turmoil and let's all vote with our money and move from the 'too big to fail' banks. Watch them fail then.

Comment number 20.

And on the 300th day Flash Gordan anounced the clamp down on Mammon and the "greate exodus" of the city started forcing the indland revinue to pass the burdon of taxes that was born by the great city onto the surfs.

Comment number 21.

The tri-partite approach has failed and we should be reducing the scope of the FSA. Whilst better control of the banks is needed I would still like to see the hedge fund industry reigned in much more. Hedge fund manager appetite for estoric investments was a signficant factor in the maligned behaviour of the investment banks which got us into this mess. Can the greed culture be regulated?

Comment number 22.

Well they can do what they want to fix the financial system, apart from a huge, huge snag. They can't do anything which makes Gordon Brown look like he's done something wrong, even if this means sacrificing the country. And the Tories want to do exactly the opposite, make Gordon look wrong at every opportunity in their ways, which may be better, but not perfect. What a joke.

Comment number 23.

It won't work. Well it will work in so far as it will achieve what the City wants but it won't work for the rest of the economy.

Unless we create mechanisms which help rebalance the economy (as Mandy and Ali have said they want but really probably don't) then there will be no real economic progress and the economic divide will widen.

Comment number 24.

Maybe this is a bizarre perspective, but I can't help but think that we're focussing on the wrong people.

My sense, for starters, is that we should hive off the 'casino' banks (along with the risky Directors, the high-risk gamble shareholsers and their customers too). Those operations really are, in many senses, just posh betting shops and have nothing really to do with retail banking and the majority of the public.

But moreover, it seems clear to me that there really does not exist adequate, robust mechanisms for those people whose money it is to hold the bankers to account. And THAT should be the principal and 'core' mechanism of scrutiny and accountability. O.K., yes, backed up by all these other things, Treasury, FSA, BoE.

It's because the regulators and lawmakers don't give the customers and shareholders the powers to effectively cause banks (and bankers) to be penalised when they disrespect their customers, shareholders and the marker place, that these problems happen. They need to empower the people whose money it is that the bankers use. If bankers had to work in the culture of scrutiny and accountability that many local government officers and civil servants had to, they wouldn't get to do the crazy, risky things.

But what we see is yet another move to beef up the regulators. Those are the guys who didn't stop it happening before. Those are the ones who are in the thick of it with their mates the bankers, day in and day out. For sure, they have a role to play. For sure, strengthen their ability to sanction banks and hold them to financial account in a technical way.

Much like the Care Commission holds Social Services Departments to account for the quality and quantity of their practice. Remember though that with Social Services, that is not the ONLY mechanism, they are run by democratically elected Councils, so there is a constant scrutiny and accountablity. Banks, and bankers, need an additional mechanism like that. Far too much happens in banks 'behind closed doors'.

And NO, it won't bring banks to a grinding halt, (I can hear the bankers moaning already), but it probably will make it less financially attractive to be a senior banker. That in turn may just result in bank bosses who serve their shareholders' and customers' interests, rather than their own.

I've said it before, but why is it that the bank bosses on FIVE STAR remuneration schemes are bosses of banks that so often deliver FIFTH RATE customer services?

Answer: because the regulators and lawmakers disempower the customer and protect the interests of bank bosses.

Comment number 25.

#6 "Then print debt-free fiat currency to serve the peoples needs. The economy should serve the people, not the people the economy."

WOW !! What an innovative thought !! Who'da thunk it possible ?? Without fractional reserve banking what, pray tell, will be used to back up your "debt-free fiat currency" ?? Just your pretty looks ?? Zimbabwe tried that and now there are more trillionaires in Zimbabwe that anywhere else in the world, not that a trillion Zimbabwe dollars buys anything worthwhile !!

Without real backing to your "fiat currency" they'll be just so much Monopoly money, in other words funny money !! No one else in the world will accept your funny money, so how are you going to import more goods from abroad ?? Your PCs and TVs from China, your strawberries in winter from Spain, etc ??

I greatly applaud your economic sagacity !! You must be an economist !! I, on the other hand, live in the real world !!

Comment number 28.

Yes this is what Im thinking as well, we can only trust those who have acted in a responsible way. We cant trust the FSA, the government nor Mervyn King - they allowed it all to happen and told us it counld'nt be predicted.

Comment number 29.

All good news.But I prefer the idea of thhe BOE having all the power, just like it used to be when the financial system was stable and sensible.Hope Mervyn King keeps the pressure on.And several billion poorer folks around the world must agree with the Pope.....as we all seem to be working our guts out for the benefit of a few thousand people in the City of London and Wall Street.Surely it should be the other way round....they should be serving us.Angela Merkel recently pointed this out.As we've all seen it's not what's good for the company that's important, it's not what's good for the workforce that's important, it's not what's good for the nation that's important, IT'S WHAT GOES IN THEIR POCKETS THAT'S IMPORTANT, AND NUTS TO EVERYTHING ELSE.

Comment number 30.

#7 "Would it not also be prudent to seperate Investment Banking completely from the Lending Institutions so that risky investment and share dealing cannot compromise mortgages and lending."

Mortgages and lendings are safe ?? WOW !! This must be shocking news to the ex-directors of Northern Rock, HBOS and their ilk whose "lending institutions" went under lending out money on the terms of 125% of the asset backing (property value) to persons of dubious credit history and earnings levels !! Surely such risk-free lendings cannot possible damage such wise and venerable institutions ??

Comment number 31.

For my comment at 12 (Wat Riler)- "later concerned with the interests of consumers including SME's." Should read "former concerned with the interests of consumers including SME's" Apologies to all my avid readers!

Comment number 33.

#16 "If the government won't do it then we should. Move your accounts. Do some research and find a building society which has kept well away from the turmoil and let's all vote with our money and move from the 'too big to fail' banks. Watch them fail then."

And then the first time you want to buy anything on the internet, the transaction fails because your "bank" is not connected to any other that will accept their transaction !! Well done !!

#15 says "I agree why people are angry with the industry; capitalism in the good times and socialism in the bad times cannot exist any longer - but it's a problem that needs to be thought about carefully and not rashly."

And I agree with his statement and applaud this stance !! Rushing headlong into more crazy schemes is just *EXACTLY* what this government is doing !! No thoughts needed !! Possibly because they don't have any or can't have any !!

Comment number 34.

The Treasury is, as usual, making things too complex. They have forgotten, or perhaps are so stupid that they have never learnt or understood the value expressed in the expression "KISS" KEEP IT SIMPLE, STUPID!

The more complex you make something the more ways round will be found. This is well exemplified by the size of in the Inland Revenues handbook which has grown enormously in recent years.

You cannot finesse banking regulation - it will not work as (ostensibly) intended. The Treasury, we must allow, is not stupid and indeed we must assume that it knows that by making the regulation complex it intends that it does not work!

Simple rules will work - complex ones will not work. (Of course there is the question as to whether we actually need regulations that "work"?)

E.G.

1. Money should move internationally only when following trade in GOODS.

2. Lenders are unable to repossess assets when the lender cannot prove that they themselves did due diligence on the borrower and showed that the borrower had sufficient funds now and in the future to repay the loan.

3 All inflation in the economy must be taken into consideration and managed by the central bank managing the price and availability of money.

4. Global profits of global businesses (and individuals) should be taxed in every country in which they operate. If proper accounts are not produced then revenues should be taxed as profits, weather or not they are remitted.

That should do for starters. Simple and unavoidable! (OK it might be wise to spend more than a couple of minutes drawing up the list, but the approach should be the one taken.)

PS

What about a Wealth Tax on businesses and individuals? It is surely u8nacceptable that Russian oligarchs can afford yachts more like naval frigates (missile defence systems indeed!)

Also what about a maximum income too? We have a minimum one so why not a maximum one too? If we are truly bothered about economic disparity you know it makes sense!!!

Comment number 35.

The senior management in the financial 'services' industry makes millionsfor themselves by investing and speculating with our money without too much of a risk for themselves. This has been exposed and explained again and again in countless articles. Let me ask you a question: when have you last met a group of people that is willing to voluntarily give up the massive privileges they have amassed for themselves over decades because of care for society? This conflict of interest between 'senior bankers and traders' and society has to be seen as the ruthless pursuit of personal profit which it really is. Banks, hedge funds and the pension funds industry need to be equally ruthlessly exposed as the exploitative long-term ponzi scam which it most of time is. Yes, some taxes and rising asset prices are produced during the good part of the business cyle. But, inevitably, the bill has to be settled at some point in time and currently the laws and rules of the game work all in favour of the 'financial oligarchy', and not in the longterm interest of the citizens of this 'democratic' society. Can the democratic society in the UK even change the rules and laws of the financial game which currently exploits them and makes them defenseless? Not without very determined politicians who care for the average citizen first. We need politicians who can see through the propaganda of the few who currently live nicely by exploiting the many.

Comment number 36.

33. At 09:37am on 08 Jul 2009, ishkandar wrote:#16 "If the government won't do it then we should. Move your accounts. Do some research and find a building society which has kept well away from the turmoil and let's all vote with our money and move from the 'too big to fail' banks. Watch them fail then."

And then the first time you want to buy anything on the internet, the transaction fails because your "bank" is not connected to any other that will accept their transaction !! Well done !!

Some one got out of bed the wrong side! Don't you think my huge retail bank would be an attractive partner? Or do you like having your money used a gambling chips? Tell you what. You gamble and I'll be sensible. See you on the dole line.

Comment number 38.

Isn't there a major confilict of interest here. HMG are now major shareholders in two banks and owns a third so are we asking turkeys to vote for christmas? Why would the government severely hamper the potential for banks, it owns massive stake in, to generate the levels of profits they need to increase the share values that the governement are relying on to plug the massive hole in public finances ahead of the general election to give GB a fighting chance of pointing at their actions during th crisis as the right move for the taxpayer?

Comment number 39.

These new regulations will not make a scrap of difference.We are broke.Gordon Brown and his cohorts advises us that the economy is now turning the corner and they detect "green shoots" in Growth but I don't know where this Growth is going to come from.We don't make anything any more to export,we import everthing we eat-so where IS the Growth opportunity.We are going to be in this sorry state for years to come unless we do something radical like coming out of the EU and drastically reducing the costs of Government.

Comment number 40.

The banks made big money (as you would) ultimately out of the people's greedy passion & thirst for cheaper mortgages and higher savings returns.

The esoteric vehicles the banks used to create wealth (and bonuses) were a complete mystery to the man in the street. The highly paid Tripartite bodies failed to have the skills or clarity of purpose to unravel all the nuances on our behalf, but many of these leeches still left office with huge compensation payouts from the state.

Perhaps the new tighter regulation being proposed should instead be simply a question of asking the Financial Journalists - like Robert - for help, because it appears most if not of them (including Robert) have managed to find a little article written by them somewhere in the past 10 years or so - warning that it was 'obvious' this was all going to happen...Must get my 20/20 hindsight checked.

We are, of course, all to blame, ultimately; but perhaps some more than others.

Meanwhile, those fat cats who made the huge cash will continue to do so in the future - at the expense, of course, of the little skinny kittens.

Comment number 41.

And let's hope that new regulations really do bring an end to the era of "Browns' folly". (And also courtesy of a few dodgy folks in the USA).A few decades ago you could TRUST the City with your pension, you could TRUST the City with your savings, and you could TRUST the City with your endowment.These days you can only TRUST them to put it in their pockets, or lose it on the "horses".

Comment number 42.

Comment number 43.

Look, despite the political waffle and the bleating from bankers, everyone knows, in their hearts of hearts, what this is all really about.

It's about self-interest against group/social responsibility.

What has happened in the banks is like a builder building a block of flats, because he'll make a wad selling them off at however many bucks each. Then, because he built them cheaply (to make big bucks) and therefore badly, the block of flats collapses and kills many people.

What stops that being a day-to-day event in the UK? Planning law and building regulations.

So, now transfer that scenario to banks. 'Soft touch' the regulations and people WILL take riskier gambles with other people's money. Their self-interest will drive them on to against the group interest of the shareholders or customers.

And each time a banker makes out 'we should have less regulation to allow us more scope to do different things' - they are WRONG.

Less regulation, or ineffective regulation, will always lead to more and more financial 'collapsed blocks of flats'.

Comment number 44.

A very good article in the Wall Street Journal about why the various government initiatives to kickstart banks lending, are being snubbed by the banks and the small to medium sized companies they were meant to help.

Comment number 45.

We will ever get anything concrete from a dead in the water government who is as powerful as a dead sheep, an inept FSA who have no more sense than that dead sheep and the Banking comunity who wouldn't know how to tell the truth even under threat of lining up with the dead sheep.

There is not one person in the UK who doesn't have to learn the art of good house keeping but it appears, Government and the Banks are exceptions to that rule and if you look at the management of the FSA you will see they haven't a clue what so ever on management or unbderstanding the problems they are facing.

The Bank of England was and is the only serious regulator in the game and Browns giving it freedom to set interets rates was lost by his micro management of the triumverate.

Enough is enough King must take control and his principal that no one should be too big to fail has to stand.

If Lord Adonis makes similar comments with regards the railways why are the banks deemed untouchable and protected like no other.

BBeing big has produced little to nothing save big bonuses obtained by abusing the system at every turn. We need more banks not less and set p on a regional basis.

Teh days of bankjs using savers deposits to speculate on multiples they would never lend on must end.

This Government is incapable of taking the necessary steps and the sooner it goes the better the problem has been and still is the FSA whoi love to talk the talk but are incapable of walking the walk let alone knowing how to crawl.

Comment number 47.

Robert, could you please do a piece about what is really happening please. The return on my meagre savings has gone from around £1,000 p.a. to around £50 p.a. I assume it isn't only me. What on earth is REALLY going on?

Comment number 48.

#21 "The tri-partite approach has failed and we should be reducing the scope of the FSA."

The FSA *was* and *is* a NuLabour/Brownian abortion and should be eliminated completely !! Return the powers to where they truly belong - the BoE !!

"Can the greed culture be regulated?"

Yes !! Just make rewards *AND* punishments contingent on the *FINAL* results of any action !! Currently, it is not so much a greed culture as an irresponsible culture !! There is *NO* punishment that mirrors the reward !! So those people can grab all the benefits and walk away when things go wrong without being punished for their risk-taking !! Their attitude is "let the next sucker get it in the neck for their mistakes" !! Making them personally liable will end much of this irresponsible culture !!

Comment number 50.

#24 "If bankers had to work in the culture of scrutiny and accountability that many local government officers and civil servants had to..."

What happened to "the scrutiny and accountability" in Harringey Council when the Victoria Chimbe and the Baby Peter cases occurred !! Who was scrutinising and who was scrutinised ?? Who was held accountable ?? Only the minions !! Did any council member or senior local government officer stick up his hand and admitted failure ?? No !! They insisted right up to the end that they were right !! I rest my case !!

Comment number 51.

#27 "The Governor of the Central Bank of Thailand knows more about this than Gordon Brown or Alastair Darling. Puts them to shame."

He damn well should !! It was his predecessor whose actions triggered the Asian Currency Crisis and made him greatly sought after in many parts of Asia !! Rumour has it that hitmen were hired by those who lost heavily in that crisis !!

Crash Gordon will probably walk off with a patent of nobility for having badly screwed up our economy !!

Comment number 53.

We live in a global economy - we can't FIX the UK banking system in isolation. We need competitive banks and to have a global level playing field. Basically we need some global leadership - not just looking at the UK and moaning.

Comment number 54.

Isn't there a major confilict of interest here. HMG are now major shareholders in two banks and owns a third so are we asking turkeys to vote for christmas? Why would the government severely hamper the potential for banks, it owns massive stake in, to generate the levels of profits they need to increase the share values that the governement are relying on to plug the massive hole in public finances ahead of the general election to give GB a fighting chance of pointing at their actions during th crisis as the right move for the taxpayer?

-----------------------------------------

A good point...as far as turkeys are concerned!

However, this argument does not address the moral dimension relating to this dilemma.So what your saying is that the ability of banks to rip off customers, make obscene profits and pay themselves even more obscene bonuses (boni?) is OK...so long as the government also gets in a piece of the action!

It's akin to turning a blind eye to prostitution because your wife's on the game as well...oh, and the extra money will come in handy.

But then of course, we all know where Gordon's moral compass points...don't we!

Comment number 55.

There is actually no reason the current account system which is a pure payment and transfer UTILITY should be in the hands of the banking system at all. As you have pointed out, this critical payment system becomes hostage to the 'too big to fail' argument. Ideally it should be government run for the benefit of the people. There is a cost to providing infrastructure like ATMs, etc. and this cost can be paid for by depositors. Naturally, one would expect all these funds to be guaranteed, but pay no interest.

We have developed an expectation as depositors that banks will pay us a 5% interest with no risk to our capital. That itself is unsustainable.

You have rightly corrected another poster in pointing out that mortgages and lending are significantly risky, and the logical system for that is that people who deposit their money with mortgage lenders in return for interest payments should be fully aware that their money is at risk should the lender go down.

The investment banks, hedge funds, PE groups, etc. should only be allowed to gamble with shareholders' money, and any individual wanting these risky but high returns is welcome to buy shares in these groups. As such, they can also try and attract high return deposits, as long as the depositors are again willing to lose their deposit as above.

Comment number 56.

#34 "4. Global profits of global businesses (and individuals) should be taxed in every country in which they operate. If proper accounts are not produced then revenues should be taxed as profits, weather or not they are remitted."

Unfortunately, the companies will just incorporate in other countries and trade with Britain through cut-off, deniable operations !! Good sentiment but not truly practical !!

"What about a Wealth Tax on businesses and individuals? It is surely u8nacceptable that Russian oligarchs can afford yachts more like naval frigates (missile defence systems indeed!)

Also what about a maximum income too? We have a minimum one so why not a maximum one too? If we are truly bothered about economic disparity you know it makes sense !!"

Why bother with taxes ?? Just pay everyone a fixed common income and watch how fast they flee the country !! Equality, Stalinist style !! And don't forget the gulags !!

Comment number 58.

Mr Peston,The title of your piece says it all - 'Treasury PATCHES up Regulatory system'. After the worst financial period for over 60 years, the response is to PATCH a failed system. This is a political response, the PM who as Chancellor set the failed system in place, cannot now make the necessary significant changes that are required, since his past association and electoral position inhibits that change for the good of the country. There are many good ideas from the contributors to this blog, and commonsense dictates they should be discussed seriously by the Opposition parties and then implemented when a new government is formed, not just patching up. Some of them mentioned are:Split the retail and casino banks, ensure liquidity ratios that reduce risks, bring back salary multiples for mortgage loans, curb the hedge fund industry, change the regulatory system so that one organisation controls efforts, to reduce confusion and therefore something slipping between 2 or more organisations vying for the same territory (it would not be wise to disband the BoE (!!) so the FSA should go, etc. etc. If a new Government is not formed then the significant changes would still not be made and another catastrophe awaits us.

Comment number 60.

I think this famous quote by former Govenor of the BofE Sir Josiah Stamp sums up the truth about the banks and any pointless attempt at reform...

What think you?

"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them,but leave them the power to create deposits, and with the flick of the pen they willcreate enough deposits to buy it back again.However, take it away from them, andall the great fortunes like minewill disappear and they ought to disappear, forthis would be a happier and better world to live in.But, if you wish to remain the slaves of Bankersand pay the cost of your own slavery,let them continue to create deposits."

Comment number 61.

I don't think that I was saying anything of the sort and was certainly not condoning this government going easy on the banks for their own benefit. I was simply making the point that that is the ridiculaous position the goverment finds itself in at the moment. If anything my point is that this government are so morally bankrupt (as well as financially) that there is no way they are going to legislate to heavily against banks that they are relying on to bridge the public spending gap by way of share price increases. (At least I hope not, I've been buying Lloyds and RBS shares like they are going out of fashion - which they probably are thinking about it)

Comment number 63.

#36 "Some one got out of bed the wrong side! Don't you think my huge retail bank would be an attractive partner? Or do you like having your money used a gambling chips? Tell you what. You gamble and I'll be sensible. See you on the dole line."

I don't gamble !! I just put my money in the largest *INTERNATIONAL* retail bank that has High Street operations in Britain - HSBC !! You can carry on putting your money in Northern Rock, Bradford and Bingley, etc. !!

And since I'm comfortably retired, I don't need the dole, thank you !! :-)

Comment number 64.

#43 Excellent analogy !! I like that !! Its not just more regulations but effective regulations back by a set of punishments as teeth !! As in your analogy, if there is no punishment for the builder, he will keep on building block of flats that collapse !! Slapping him on the wrist will not stop him !!

Comment number 65.

"There is actually no reason the current account system which is a pure payment and transfer UTILITY should be in the hands of the banking system at all."

I think there is a lot of sense in this statement. We've moved from a largely cash-based society where the notes and coins were printed and controlled by the Government to a largely cashless society where transactions are done electronically between current accounts in the control of the banks (who can of course use the money in these accounts as reserves on which they can make risky loans). The stability of the system would be greatly increased by taking this cash-replacement aspect of current accounts back under Government control and effectively back out of the fractional reserve system.

There seem to me to be a number of ways in which this could be achieved. Perhaps provide a real alternative to bank current accounts by upgrading NS&I accounts to proivide full current account capabilities? Or just say that Government guarantees on savings would only apply to a particular type of current account which the bank would have to keep in the form of cash or Gilts and would not count towards fractional reserve ratios?

Comment number 66.

None of the regulators saw the last boom and bust coming so to rely on better regulation to prevent the next one strikes me as foolish.

I agree with those who call for the separation of retail banking and so called investment (casino) banking.

The big banks and the City in this country have too much power and influence to the detriment, as we are now seeing, of the rest of the country. The politicians appear unwilling or unable to act against them.

Comment number 67.

#63 ishkanderI don't gamble !! I just put my money in the largest *INTERNATIONAL* retail bank that has High Street operations in Britain - HSBC !! You can carry on putting your money in Northern Rock, Bradford and Bingley, etc. !!

Look at the HSBC share price. They have just as much toxic debt as the rest of them but there 'international' exposure (read Asian) has helped sentiment. They lend at 8.7% to very good credit rated customers.What now happens when Asia starts collapsing. In China loans are going through the roof. Another sub-prime waiting to happen. HSBC bought a sub-prime lender a few years before the market exploded and they had to write off a lot of the initial investment.Co-Op bank or even Nationwide look a better bet but I haven't looked at them closely enough yet.

Comment number 68.

The Banks "may have" is a very diplomatic way of putting it. In my opinion it was greed that guided the banks to attempt to make more money out of something presented to them as a "sure thing". Unfortunately the sure thing was full of holes like Swiss cheese. I do not believe for one minute that there is,nt a person in the world that is able to analyse exactly what went wrong , why it went wrong and what was the root cause of our current situation. I believe this is already fully understood but is not something certain bodies in the uk would like made public. The timelime of events should be investigated step by step and where necessary procedures put in place to avoid this ever happening for the same reasons again. If the resonsibility of any actions required were to fall at the feet of the present government I would not hold your breath.

Comment number 69.

I'll believe it when it happens, because the government has a positive disincentive to introduce meaningful regulation. Any tightening up to reduce risk will bring with it - almost by definition - a reduction in potential profit, which in turn will result in reduced tax revenue. Such an outcome is unlikely to find favour with the Dear Leader and his Treasury Team.There was a serious imbalance between spending commitments (and ambitions) and the revenue to pay for them before the current crunch, so any action that results in less cash to throw around, while acceptable to the electorate, will not be popular in government circles.The 10% tax debacle is itself evidence of this, and we can perhaps now see the "extended drinking hours" policy as nothing more than a way of raising more cash for the Treasury coffers, even if it was dressed up in somewhat tortured arguments about "cafe culture" and "choice". I do not think we would have to work over hard to identify other examples...

Comment number 70.

Thanks for pointing out the papal statement - being a protestant I cannot accept the concept that the RC Church and a priest are the only way to connect to God which might colour my judgment somewhat but having now read the sections on the market I am astonished at the intellectual incoherence of the papacy (the environmental section is, however, particularly interesting and good). As an economic recipe it is about as useless as communism, shame because many of the aims in the statement I agree with.

As for other complaining that banking regulation was fundamentally wrong because we have just had the biggest breakdown in 60 years - would you complain that a machine was fundamentally badly designed if it only broke down once every 60 years? Of course you would not. My take is very simple. The crisis happened for two reasons:

1. Asset price inflation was no longer part of inflation monitoring (and hence interest rate policy) in a number of major economies particularly US and UK - a property bubble was allowed to run out of control

2. Bank risk systems broke down and this was made worse by Basel II which provides that the amount of capital a bank must hold is based on a mark to market risk model created by the bank itself.

The combination of the two allowed banks to lend more and more based on less and less capital. Fix these areas first please.

Comment number 72.

Firstly, I enjoy reading your blog and think you make some great points. The Chancellor could do with taking note.

With regards your sentiment "no two geniuses can agree which tools are best". If two genuises could agree and a financial epidemic of use unsued; wouldn't it be more dangerous, and amplify so-called 'herd behaviour'. I'm thinking of the Black-Scholes model in particular here.

Comment number 73.

#55 It's what I've been saying all along. Split the retail banking from the gamblers (oops, sorry, I mean investment and merchant banks, hedge funds, etc.). Let those who wish to gamble, do so !! Caveat Emptor !!

Also, if banks lend money out for interest, then surely we can lend money (deposits) to the banks for interest. What that interest is should be determined by *TRUE* market forces and not politically motivated dictats from the government !!

Comment number 74.

#67 "In China loans are going through the roof. Another sub-prime waiting to happen. "

WOW !! That's news to me !! Where did you get this fact, if fact it is ??

However, HSBC has not gone galloping off to the government, cap-in-hand, asking for a bailout, has it ?? And how will you pay for imports from abroad with your Co-op account !! Co-op is a well run local operation and has little or no international presence !! Its international transactions are carried out through international banks !! Try drawing money from your Co-op account in France *Without* a debit or credit card !! Have fun !!

Comment number 75.

This means that any one in retail banking who is any good or has experience or concience will be taking redundancy and moving on voluntarily. The lower levels will pay for the transgressions of others, distant within their organisation.

Banks generically have made losses as a result of the environment they inhabit being changed wholesale by a lack of security brought about by failed insurance in the face of reckless lending and investments. These transactions have been historically wrongly priced to risk by socking at the security blanket of insurance.

So much for the history lesson. Now the general public witnesses the banks stopping lending, starting charging, starting repossessing and re-negotiationg existing contracts with pecuniary assiduousness to claw back as quickly as possible what is lost from the bystander in his innocence.

Those with established homes, pensions, businesses, employmnets are depleated wholesale as a result of "reckless lending and investments" and will be further so as the banks and government impoverish them further by the effect their actions have on interest rates, Exchange Rates, the stock exchange and government borrowing requirements...

We are witnessing the wholesale re-allocation of wealth resources away from home owners, employees, pensioners and businesses to the banks and the government as they claw back "the locked up wealth of generations" through their ability to affect income and expenditure by manipulating on a national / international scale interest rates, exchange rates, the stock exchange, govt. borrowing, bank lending policy, bank charging regimes, mortgage percentages...

Within this debacle "they" (The generalised criminal!) "Regulate" 'reckless lending and investments' through 3 bodies. Well that's a crowd and it "was not me Sir it was him" scenario. Add to that the international accord dimension to get four stooges and you have no chance of seriously affecting the international flow of funds between multinational organisations.

From a distance I have no issue with separately incorporated investment arms distinct from saving and loans. So what's the catch for vested interests? What's risky anyway? Set up a committee.

Who cares aboout capital to equity ratios giving control at the bank level?

CONFIDENCE prevents a run on a bank / organisation no matter what the leverage.

"Reckless lending and investments" and the following government actions, knee jerk corporate consolidations and change of national ownership have destroyed confidence and trust.

Punishment for these misdemeanours has not been meted out to the finance industry. No! Battered are the rank and file citizen, pensioner, business man, lawyer, accountant, estate agent, house-builder, investor in the wider economy stripped of the wealth, dignity and independence of generations and the ability to shop for anything, food, clothing, houses, cars, services......

One UK regulatory authority please. Effective powers. The acceptance of responsibility and criminal prosecutions. No less.

P.S. I have had one customer while typing this. It was good therapy and I remain yours BSc (Econ) Hons.... Have a nice day.

Comment number 76.

Your 2nd option seems easier, banks are forced to keep current account monies as cash which is not included in the fractional system. Even gilts are subject to price fluctuations, especially the way the uk government borrowing is heading. Also, these cash deposits can be treated as 'client money', and as such segregated from the banks' own balance sheets, unlike the ridiculous system we have today. The banks can charge for providing the convenience of ATMs, etc.

Banks can them compete freely to attract 'at-risk' deposits which can be used to lend for mortgages or company debt or whatever, whether on a fractional basis or not as the risk profile of depositors demands.

If it turns out that banks are only able to attract very few 'at-risk' deposits, then at least we are being honest about how much credit we as a society are willing to create. This will reduce asset prices (good for everyone) and reduce risk in the system.

If banks lend on a non-fractional basis to home-buyers for example, then they are lending what they HAVE to buyers who are trying to buy something with money they don't have.

Whilst this is risky enough, so far, we have been lending what we DON'T have to people who want to live beyond their means. Then we use convenient inflation / bailouts to save us and pass the debt on to future generations in the form of unaffordable property and higher taxes. Other than some German politicians, I do not know any politicians anywhere who have acknowledged this, and are trying to do something about it through regulation and public spending discipline.

Comment number 77.

"As for other complaining that banking regulation was fundamentally wrong because we have just had the biggest breakdown in 60 years..."

Oh, but that was the case!

We've been doing boom and bust in one form or another since human beings invented markets. It hasn't been working just fine for the last 60 years, it's just this downturn is bigger than the other recent ones.

The problem isn't the industries, nor the markets - it's the people!

The markets and industrieds don't need regulating - it's the people who do!

A (small?) percentage of people are of the character and personality to 'over play their cards' when gambling. That is irrespective of what they are gambling with.

The problem with the banks is they gamble only taking into consideration the effect of the market and the share price and other 'on paper' (or on spreadsheet) considerations - they don't count the human costs not even to their own shareholders or customers.

Insofar as that is the case, they tend to behave in anti-social ways, by pushing their investment mechanisms too far, e.g. by offering to people more credit than they can realistically afford, by trying to be the 'biggest' player in the field even when following that strategy pushes the bank over the edge and forces the government to bail the bank out, etc., etc.

Those actions have caused a lot of people serious distress, from unemployment, to repossession, to bankruptcy (a process which ironically banks are immune from), temporary lay-offs, reduced working hour, etc., etc.

These people need to be prevented from causing such damage to society. If the financial industries and the politicians were not so inextricably in bed with each other, society might well demand these people be imprisoned and kept away from society in order to protect society.. The best we can realisticaly hope for is that their capacity to cause damage will be curtailed by regulation and good governance.

As we've recently heard of yet another 'rogue trader' episode, it would seem financial regulators are better at talking about putting things right than they are at doing it.

Comment number 78.

Totally agree with comment 6, poppajayjay. The system of money creation will not change for the better when the politicians serve the bankers' interests and not the interests of the majority. Tony Blair is now working for Goldman Sachs who have done very well out of US tax payers bail out money.

Comment number 80.

Justin forget about relgious pious, the only reason why the finacial markets went into meltdown was because none of the banks or bankers knew which banks were over exposed and to what risks and more importantly by how much.

That is the most fundemental requirement of any finacial system and once the integrity of the system was found lacking, especially one that relied so heavily on mutual trust it was bound to collapse. That is the reason why the global financial markets failed so spectacularly and with such dire consequences for everyone else except it seem the perpetrators.

The only people to blame for that happening are the bankers or traders who lacked the knowledge and skills to fully understand the implications of the methods they were using to increase the borrowing leverages. There is of course the other possibility that they chose not to fully understand the implications of what they were doing because their greed triumphed over their integrity corporate responsibilities.

Comment number 81.

the way gordon & co tip toe round the bankers makes me sick. have no problem being able to find out my finances when i refuse to pay a fine for not wearing a seat belt whilst driving out of a parking space

Comment number 82.

What is most annoying abut all this is watching the Goldman and other bankers earning massive bonuses selling the government debt which we the tax payers took out to keep them all in business. Surely the government should have the entire banking industry signed up as a precondition to work commission free or ensure bonus's would not apply to this work activity.

Also with a global bank, who knows thier capital position? The way lehmans moved money round the world in its last days shows the tricks banks can pull. The UK branch may have all the readies on deposit, but a subsiduary in say Nigeria could have no funds on deposit yet the risk exposre is still there. Any thoughts Robert?

Comment number 83.

China loan fact from the Chinese official figures.HSBC not needing cap in hand yet but there has been talk. Not now there can value toxic debt at own model prices, I admit, but that doesn't fill me with optimism.I have MasterCard, Visa, American Express etc. I do not know if I would have problems with Co-Op card account but I don't get your arguement.

Why are HSBC trading so low then if they have not got problems? You should sell your house and invest the proceeds into HSBC shares if you think they have avoided the problems.

Comment number 84.

I recall people slating banks months ago for the introduction of monthly flat rates for current accounts, but believe it is time for a basic charge to be implemented - people are usually rightfully skeptical of free lunches, it's time this applied here also (standard low cost charges, not bundled in with 'travel insurance' etc as currently offered).

"If banks lend on a non-fractional basis to home-buyers for example, then they are lending what they HAVE to buyers who are trying to buy something with money they don't have."

This is basically the essence of non-fractional lending which we as a society rely on heavily for housing (although technically it's what the bank has for a commonly unknown period, in the form of re-lent capital from the depositor).

The problem isn't the concept, it's the application. The main argument for inforcing a fairly high ratio would be the monumental mistake many banks made in building balance sheets with illiquid and poorly priced and rated assets.

I believe a lot of the economy's current problems are underpinned by a lack of confidence. This appeared to be returning, but an unexpectedly bad unemployment figure has raised questions once more. Quite simply the loan books we expect banks to inflate (and also the money we as tax payers inject in order for them to do so) is going to get written down time and time again until unemployment is contained (no mean feat).

For me, this is the black whole people refer to as a transfer of wealth from the tax payer to the corporate world.

I think one of the main ways to increase confidence which hasn't got much attention recently would be to establish truly impartial rating agencies (better versions of Standard and Poors for example). It may be that the whole ratings issue needs to be redefined, as it is by nature very difficult to predict the future or to break down CDO's into investment grade/non-investment grade levels. At the very least ensure that the agencies used to rate and authenticate banking products are not paid for by investment banks!

Comment number 85.

Yes, that's the sort of thing I was thinking. It's a matter of splitting the "utility" cash-replacement aspect of money from the savings and loans side. Savers should be able to choose based on the level of risk as well as on the level of interest. If they want to take a higher risk to get a better return then that's fine, but this should not be guaranteed by the Government any more than the Government should guarantee investments in shares.

This is separate from splitting "retail" savings and loans from investment banking (which I also think should be done). It's a similar concept but at a different level.

Comment number 87.

#80 Happy to forget about religious pious. You are of course correct that confidence and trust is a big issue, the credit crunch happened when it did because there were too many "unknown unknowns" on bank balance sheets so trust dried up but I think that was merely a question of timing of the crash - the crash would have happened in any event because of the factors I mentioned in my first post.

#77 I have spent a lot of time working with banks on managing "problem" loans. Calling in a loan and pushing a company into insolvency (which usually involves job cuts) is not something banks, in general (there will always be the exception) do lightly, it is viewed in the UK as very much the last resort solution. I am happy to admit this was not always the case - in the recession of the early 1990s it was often the first option. Also please remember that banks could not be reckless about lending if people and companies were not also reckless about borrowing and their ability/prospects of repayment - it takes two to tango.

Comment number 88.

....."If banks lend on a non-fractional basis to home-buyers for example, then they are lending what they HAVE to buyers who are trying to buy something with money they don't have."

This is basically the essence of non-fractional lending which we as a society rely on heavily for housing (although technically it's what the bank has for a commonly unknown period, in the form of re-lent capital from the depositor).

-----------------------

I agree, and that is the central problem about lending only what you have in deposits as being the solution to all our woes....

A £1m deposit today at a Bank may be nine or ten 100k mortgages (each repayable over 25 yrs)tomorrow; take the £1m deposit out the next day and the bank has lent £1m it no longer has.

Safe, prudent and profitable long term lending for property could be done by the Government, or by a Government Bank, where deposits would not be removed ; no doubt the EEC competition / state aid rules would knock that solution out.

Comment number 89.

#83 "Why are HSBC trading so low then if they have not got problems? You should sell your house and invest the proceeds into HSBC shares if you think they have avoided the problems."

Extremism and greed !! That's the problem will many nowadays !! Why should I sell my house and invest the proceeds in HSBC when (a) I am happy and comfortable with my house and (b) I have sufficient income to retire and do not need more ?? I'm not greedy !!

It is this eternal pursuit of more wealth that drives this current debacle despite the abundance already in hand !!

"I have MasterCard, Visa, American Express etc. I do not know if I would have problems with Co-Op card account but I don't get your arguement."

Try drawing money from a Co-op bank in France if you can even find one !! I can draw from an HSBC account from HSBC branches in many parts of the world !! Actually, I did it in Paris recently !!

"China loan fact from the Chinese official figures."

Considering that the CBRC (China Banking Regulatory Committee) restricts the percentage that each bank registered in China can loan out in total, I have to wonder what your definition is of "going through the roof" ?? 100% of capital ?? 200% of capital ?? Some numbers please, if you will !!

"What now happens when Asia starts collapsing."

Poor Asia !! They are not making as much growth as they did !! Why, China has a "mere" 7% projected growth this year according to the IMF !! Meanwhile, strong, steady Britain which is "best placed to come out of the recession" has a massive -2% growth !! Perhaps we should be careful about using emotive words like "collapsing" without stating the real world numbers to support them !!

If 7% growth is "collapsing", then Britain, with its -2% growth must be at death's door !! Using emotive words without the backing of facts and comparisons is for the gutter press. It is not suitable for a discussing blog like this !!

Comment number 90.

#87 "Also please remember that banks could not be reckless about lending if people and companies were not also reckless about borrowing and their ability/prospects of repayment - it takes two to tango."

Absolutely. It is always easy to blame the banks but ignore the borrowers !! Property speculation has a lot to do with the current debt crisis !!

Comment number 91.

Darling defends the decision not to change the tripartite system by pointing to the collapse of Barings and BCCI when the Bank Of England had sole responsibility for the financial stability. Is he really comparing these isolated instances that happened at different times to the wholesale collapse of the UK banking system - nearly every single UK bank/building society was in danger not just 1.

It does not make sense to say that size of banks does not matter and then point to management's failure to understand their businesses as being one of the main cause of the crisis. Smaller banks with simpler businesses would mean that management does understand the risks they are taking.

Comment number 92.

#91 "Smaller banks with simpler businesses would mean that management does understand the risks they are taking."

Northern Rock was not exactly a world straddling bank !!

Barings failed because of one man - Nick Leeson - and BCCI, from what I can gather, did so because some of its transactions were less than pure !! Of course, Comical Ali will spin pure fluff out of unrelated incidences !!

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